Monday, March 24, 2008

"We're in for a potentially significant regulatory response," said Glenn Hubbard, dean of Columbia University's business school and a former chief economist for the Bush White House, referring to the credit crunch and its impact on financial markets. "The hope is we won't overreact."Both advocates and foes of tighter regulation agree that high-profile breakdowns in quality control and accountability have fueled the pendulum swing away from voluntary industry standards. That shift has been accelerated by a growing public perception that American companies and regulators have lost a large measure of control over the safety and quality of products increasingly produced by a global supply chain.Democrats, and even some Republicans, are blaming lax federal supervision for safety problems with products ranging from all-terrain vehicles and lead-tainted toys imported from China to poorly operated nursing homes and faulty emissions controls at coal-fired power plants.The powerful House Energy and Commerce Committee wants to bolster the power of food and pharmaceutical safety agencies, after the largest beef recall in U.S. history last month, recalls of contaminated spinach, peanut butter and pet food last year, and recent deaths linked to batches of the blood thinner heparin whose active ingredient was manufactured in China.When lawmakers return from their spring recess March 31, they plan to begin work on what could be a sweeping overhaul of the financial regulatory system. Under the current system, responsibility is spread across at least eight agencies, an arrangement Securities and Exchange Commission Chairman Christopher Cox last week called "nearly irrelevant to today's market."Such statements, along with its efforts to ease the housing crisis by prodding mortgage giants Fannie Mae and Freddie Mac into raising billions of dollars in new capital so they can finance more mortgages, illustrate the Bush administration's shift away from its early reluctance to interfere in markets.A coming report from the conservative Heritage Foundation said the Bush administration finalized nearly 4,000 new rules, both large and small, in 2007, the most since it took office in 2001. The most sweeping among them included fine-particle emissions standards for smokestack industries; regulations governing blood transfusions and dietary supplements; side-impact collision standards for autos; and rules designed to protect chemical facilities from terrorists.Last week, aviation authorities ordered special maintenance checks at every U.S. airline, an unusually broad response to lapses in safety-inspection lapses found at Southwest Airlines.However, some of the Bush administration's regulatory moves -- such as easing pollution control requirements for agriculture and smokestack industries under clean air and water laws -- have followed lobbying from business groups, which feared stricter rules if a Democrat is elected president. Others have been ordered by courts, or passed by Congress in response to crises.All three major presidential candidates have shown willingness to pursue tighter rules during their time in the Senate, but have said little on the stump about what role government should play in patrolling the marketplace.Republican candidate Sen. John McCain of Arizona "does not have a reflexive regulatory versus deregulatory record," said Doug Holtz-Eakin, Mr. McCain's chief economic adviser. "He'll come down where he needs to...to effectively get safety, if that's the issue.""It's a fundamental obligation of the government to protect its citizens and where there are gaps in that protection [Sen. Hillary Clinton] believes in giving our safety agencies the tools they need to fill them," said Jake Sullivan, deputy policy director for the New York Democrat. That, he added, "should be done in a way that promotes partnership and cooperation with the private sector."Democratic Sen. Barack Obama of Illinois has pushed for tougher oversight and disclosure rules for lenders and credit-card companies and an overhaul of bankruptcy laws, which he feels were "written by the financial industry for their own benefit," said spokesman Bill Burton.Opponents of government regulation concede they face a difficult climate no matter what happens in November. "Obviously the crisis in the subprime [mortgage] market has revealed a regulatory weak spot," said David Chavern, chief operating officer of the U.S. Chamber of Commerce.Even before the subprime-mortgage crisis, the group had singled out government regulation as a key battleground for the next five years. "We're going to use the whole set of tools," including advertising and Web-based campaigns and studies on the costs of regulation, Mr. Chavern added, "putting the burden on the people who are calling for the regulations to show it's really going to work."One of the Chamber's priorities, he said, would be challenging energy, labor and environmental regulations.But the recent spate of recalls has split the business community. The Chamber and the National Association of Manufacturers have stuck largely to an antiregulatory agenda. Meanwhile, lobbyists for the sectors most directly affected by the recalls -- such as grocers and toy makers -- have backed tighter controls."We approached Congress last summer when recalls started to happen and asked them to make toy-safety testing mandatory," said Joan Lawrence, vice president for toy safety and regulatory affairs at the Toy Industry Association, the industry's biggest trade group. "We wanted to create a level playing field, so everyone is testing to new regulation," she added.Those on both sides of the issue agree that calls for more regulation are driven by public concern that the market hasn't moved fast enough to correct problems. "If you go back to the 1970s, one reason the push for deregulation was successful was that there were more horror stories" about everyday products like hammers whose costs to the government were grossly inflated partly because of burdensome regulatory-compliance reviews, said James Gattuso, a regulatory-policy specialist at the Heritage Foundation. "Now the anecdotes that get the attention are on the other side."The change in mood was evident this month in debate over a bill overhauling the Consumer Product Safety Commission. The agency was gutted during the Reagan era and had struggled ever since. Then, last summer came the first of more than 110 recalls affecting 35 million toys. Nearly half were for potentially toxic lead, putting the agency's Bush-appointed chairman -- and Congress -- on the hot seat.Two weeks ago, legislation beefing up the agency, introduced by Sen. Mark Pryor, an Arkansas Democrat, was approved by a veto-proof margin in the Senate with the help of Republican co-sponsors Sens. Ted Stevens of Alaska and Susan Collins

Tuesday, March 11, 2008

this is a great example of how ton analyze your particular financial situation:

We are a couple of 63-year-olds who retired about three years ago, and took SS at age 62. I have always felt that financial decisions made in the ten years between when we retired and age 70.5, when we cede withdrawal and tax control to MRDs, could be significant for the rest of our lives. In particular, the multi-variable decisions of account withdrawal sequencing, Roth conversion, and SS repay/restart seemed particularly important. But what decision is “best?” I have read many books, articles, and posts that address these decisions individually, but saw nothing that I could map wholly and quantitatively to our situation. So, this post describes what we did to figure it out for us. Have any of you done something similar? Did you come to similar conclusions? OUR PORTFOLIO We have a 60/40 portfolio comprised of about 80% IRA, 15% taxable, and 5% Roth. Our living expenses require a withdrawal rate of about 3.2%. We are well within the 15% FIT bracket. Our current WD approach has been: 1. Living expenses from IRA 2. Taxes and extraordinary expenses from taxable account (for as long as it survives, then switch to Roth) 3. Convert IRA to Roth up to the top of the 15% bracket for as long as we can The reason for this approach has been to get the IRA value reduced as much as possible as fast as possible, without taking “too big” a tax bite, so that RMD amounts are reduced when they hit us forever in seven years. Quantifying “too big” was part of the purpose of this exercise. ANALYSIS I build a model to see how different scenarios would play out over the next 40 years, accounting for inflation and taxes. The model consists of an Excel workbook of five spreadsheets, each of identical structure with about 50 rows and 35 columns. The differences between the spreadsheets implement the scenarios described below. Evaluation criteria 1. Total portfolio value over time (most important) 2. Maximum Roth account value (for maximum control) 3. Minimum excess RMDs (i.e., minimum required WDs over what we needed) 4. Minimum incursion into 25% bracket over the years Criteria 3 and 4 are viewed as hedges against expected future tax increases. Scenarios - Five were chosen: 1. Current approach (described above) 2. Living expenses and taxes from taxable until exhausted, then revert to current approach, plus Roth-convert to top of 15% bracket 3. Current approach but repay SS and restart at age 66, plus Roth convert to top of 15% bracket 4. Current approach but repay SS and restart at age 70, plus Roth convert to top of 15% bracket 5. Current approach but abandon Roth conversion – just stay low in 15% bracket until age 70.5 when RMDs take control Calculations – For every year from now to age 100, the model computes the following, adjusting for inflation and investment return every year: 1. Tax brackets, deductions, exemptions 2. SSI, pension, living expenses, extraordinary expenses (cars, etc.), fed/state taxes 3. IRA withdrawals, conversions, RMDs 4. Account values (taxable, IRA, Roth, total) Economic sensitivity – To assess scenario sensitivity to economic conditions, I ran the model for three conditions: 1. Mid – 7% return, 3% inflation 2. Low – 6% return, 4% inflation 3. High – 8% return, 2% inflation CONCLUSIONS The model shows that for our specific situation: 1. Scenario number 2 is always better than our current approach. 2. It is also the best scenario of all in Mid and High economic conditions. 3. Only in Low economic conditions does SS repay/restart become best, but that takes until age 87 to happen. We will change our approach to scenario 2 and forget about SS repay/restart. For our particular situation, there seems to be a "sweet spot" in all this: 1. Spend taxable account first. Pretty common wisdom, but it only works in our situation if we also make Roth conversions. Otherwise we save taxes early, but end up with bigger IRAs at age 70.5 and bigger RMDs requiring more taxes. 2. Convert as much as possible as early as possible 3. But not over the 15% bracket 4. Because the additional taxes (nearly double the rate) take too big a bite too early 5. Making it take too long for the portfolio to recover Again, this post describes what we did to figure it out for our situation. Have any of you done something similar? Did you come to similar conclusions?